Below is transcript of the GATX Corporation (NYSE:GMT)’s Fourth Quarter 2014 Conference Call, held on January 22, 2015, at 11:00 a.m. EST. Skylands Capital, Gamco Investors and Ascend Capital was among GATX Corporation (NYSE:GMT) shareholders at the end of the third quarter.
GATX Corporation (NYSE:GMT) leases, operates, manages and remarkets assets, primarily in the rail and marine markets. The Company operates through four primary business segments: Rail North America, Rail International, American Steamship Company (ASC) and Portfolio Management. Rail North America segment consists of its wholly owned operations in the United States, Canada, and Mexico, as well as two affiliate investments.
Company Representatives:
Brian Kenney – Chairman, President and Chief Executive Officer
Jennifer Van Aken – Director
Robert C. Lyons – Executive Vice President and Chief Financial Officer
Analysts:
Mike Baudendistel – Stifel
Justin Long – Stephens
Art Hatfield – Raymond James
Kristine Kubacki – Avondale Partners
Matt Brooklier – Longbow Research
David Richards – Pine River Capital
Operator
Good day & welcome to the GATX fourth quarter Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Jennifer Van Aken . Please go ahead mam.
Jennifer Van Aken – Director
Thanks, Michelle, and good morning, everyone. Thanks for joining us for the fourth quarter and 2014 year end conference call. With me today are Brian Kenney – Chairman, President and Chief Executive Officer of GATX Corporation; and Robert C. Lyons, Executive Vice President and Chief Financial Officer.
As a reminder, any forward-looking statement made on this call represents our best judgment as to what may occur in the future. We have based these forward-looking statements on information currently available and disclaim any intention or obligation to update or revise these statements to reflect subsequent events or circumstances. The Company’s actual results will depend on a number of competitive and economic factors, some of which may be outside the control of the Company. For more information, refer to our 2013 Form 10K for a discussion of these factors. You can find this report as well as other information about the Company on our website, www.gatx.com.
I will give an overview of the results provided in our press release earlier this morning, provide some brief comments regarding our expectations for 2015 and, then Brian will provide his insight on some key areas for GATX in the year ahead. After that, we’ll open it up to questions.
Today, we reported 2014 fourth quarter net income of $58.5 million, or $1.30 per diluted share. This compares to 2013 fourth quarter net income of $53.3 million or $1.14 per diluted share. For full year 2014, net income was $205 million or $4.48 per diluted share. By comparison 2013 net income was a $169.3 million, $3.59 per diluted share, including a benefit of $4.5 million or $0.09 per diluted share from tax adjustments and other items. Details related to these tax adjustments and other items can be found on page 12 of this morning’s press release.
The fourth quarter and full year 2014 results are reflective of the continued strong demand for tank cars and improved demand for freight cars in North America. The following fleet performance discussion excludes GATX’s.
At the end of the fourth quarter, GATX’s North American fleet utilization was 99.2%. In the fourth quarter, the renewal rate change of GATX’s lease price index was 39.2%, resulting in the full year renewal rate change of the LPI of 38.8%. We continue to optimize our fleet through railcar sales, generating more than $50 million in asset remarketing income. We also capitalized on opportunities to grow the railcar fleet as investment volume exceeded $800 million. Within Rail International, the economic environment was challenging for GATX Rail Europe and in certain instances it took longer to place cars on lease.
Utilization was affected throughout the year, but improved 95.9% at the end of the fourth quarter. 2014 was another sizeable investment year for GATX Rail Europe with investment volume of more than 150 million as we continue to investment in new tank cars. American Steamship Company operated 15 vessels and carried 30.5 million net tons of cargo in 2014 compared with 13 vessels that carried 28.8 million net tons in 2013. Higher water levels on the Great Lakes contributed to the increased volume of cargo ships. Segment profit in 2014 was lower than in 2013; however as harsh weather conditions and ice cover on the Great Lakes caused extreme delays in operating inefficiencies earlier in the navigation season. Within the Portfolio Management segment, the Rolls-Royce and Partners Finance affiliates continued to post very strong results. And the performance of the inland marine barges improved due to strong grain shipments.
In the coming year, leases on approximately 17,000 railcars and on North American term lease fleet are scheduled for renewal. In addition, we have approximately 6,000 boxcars scheduled for renewal. As noted in the press release, we currently expect 2015 earnings to be in the range of $5.15 to $5.35 per diluted share excluding any impact from tax adjustments or other items. With that quick overview, I’ll turn it over to Brian for additional color on 2014 and our outlook for the year ahead.
Brian Kenney – Chairman, President and Chief Executive Officer
Okay, thanks Jennifer. Before we open up the call to questions, I want to address three topics very quickly. First I’ll provide some color around our 2015 earnings outlook; second, I’ll give you a quick update on the tank car regulatory situation; and third, I would like to address upfront some of the questions we have been receiving concerning the impact of historically lower crude prices on our lease fleet. So, let’s start with that 2015 outlook. As the press stated, we’ve never been in a stronger position from a fleet perspective than we are entering 2015. I mean you see 99% utilization our renewal success rate in the mid-80s. We saw an average renewal rate increase as Jennifer said in our lease pricing index of close to 40%. We have had continued success at lengthening lease term. And in general the team has done outstanding job of using the strong market of the past few years to position us for continued earnings and cash flow growth in the years ahead.
So in 2015, we project North American rail segment profit to increase close to 10% from last year to run down the income statement. Lease revenue should increase primarily due to renewing expiring leases at higher rates again in 2015. We also see a full year revenue contribution from the acquired boxcar fleet. We actually expect a smaller increase in 2015 maintenance expense than in recent years. We’ll have a full year of impact once again of the boxcar fleet from a maintenance perspective but that’s going to be offset by a drop in our tank qualification compliance events compared to last year. As approximately, 2014’s level. And if you look at investment activity, still be robust in 2015. We expect to purchase close to 4,000 cars. But it will probably fall short of the investment activity we saw last year when we had that $340 million boxcar acquisition and unless of course we see another attractive opportunity.
In international rail, we expect a slight increase in segment profit. Lease rates and lease revenue is expected to increase again they’re going to have higher lease rates as they continue their fleet renewal program of the last few years where they have been adding new cars to scrapping older cars. But, really we will be wrestling with another uneven year for tank car demand in 2015. So, we expect utilization to bounce around from quarter to quarter. That year of exchange rate is not helping comparisons to last year either. Net fleet maintenance is expected to increase slightly to the schedule activity, and investment will be likely lower than in recent years, although they still plan on adding over 1,000 cars to the fleet in Europe in 2015.
Turning AFC, we expect a small increase in segment profit this year. As you know they had a very difficult start to the selling season in 14 due to extreme icing conditions on the Great Lakes but they were able to bring on another vessel and they had a tremendous fourth quarter operationally that both met their tonnage commitments for the year as well as they took on some spot cargos which were very profitable. But if you assume a more normal start for the selling season, we expect lower tonnage in 2015 because those spot cargos aren’t likely to be available. But segment profit should still increase slightly due to some price increases as well as to lever those tonnage requirements with the lower number of vessels than in 2014.
And finally, in portfolio management, we expect comparable segment profit in 2015 to last year. We’ll have continued strong performance from Rolls Royce Jet Engine Leasing Venture and steady performance of the marine assets within this segment. So the net effect of all this is along with the expectation of slightly lower SG&A in 2015 that leads to our earnings guidance of 5.15 to 5.35 per diluted share. That would be another record earnings per share year for GATX and should result in return on equity approaching 17%. So it would be outstanding performance again.
So let’s turn to that tank car regulatory update. It’s short this time because it’s real — there is no real development here. As you may remember, the comments the notice of close rail making were due at September. PHMSA reportedly received thousands of comments. I know they spent the interim period trying to finalize their new rules and they were meeting with various interested parties to understand their comments that were submitted. They were trying to harmonize with Transport Canada, but just here as a latest public schedule has the rule being spent on the at the end of January. The clearance is expected by April 30th with the rule finalized and published by mid-May. So, we’ll obviously monitor that situation closely. But any discussion on the form of the final rule or the time frames involved is really pure speculation at this point.
And the final topic before we open the call to questions is to address the inquiries that we’re receiving about the effect of the dramatically lower crude prices and its effect on our lease fleet. You know as you know, if you’ve listened to our calls over the last few years, we’ve been a relative cautionary voice really relatively speaking the industry about whether it make sense to aggressively deploy tank cars and crude by rail service. And as discussed on prior calls, our analysis has always suggested that the market could become overbuilt for a variety of reasons.
We have talked about potential pipeline construction excess manufacturing capacity for tank cars, we’ve talked about the volatility of both the absolute price of the crude and the WTI brand differentials. There are a number of factors here. And although we discuss that risk of crude price volatility, we certainly didn’t predict or anticipate this recent free fall in crude prices. But it was one of the reasons that our strategy has been to not aggressively pursue this crude by rail business and to instead use that high demand environment created by crude by rail to continue to diversify our tank car fleet across the variety of high quality customers and commodities and car types and to lock up those attractive rates for a long period.
So at the end of 2014, we only have 2,500 cars in crude by rail service in North America none in Europe. So direct crude by rail exposure comprises about 1.7% the worldwide fleet, but having said that petroleum customers related commodities are obviously an important source of GATX’s revenue worldwide, in fact about 18% of our cars are North America are petroleum related customers. For example we owned another 2300 cars are on ethanol service in North America, we have approximately 3100 cars of service, a big part of our European tank cars leaded in the fine product service. So, naturally we do have an interest in what the effect of these lower crude prices will be. But, once again let me start by saying that our North American tank car fleet is essentially a 100% utilized right now, and as I said these cars leased at historically high rates for very long average term. And today, we have received no indication from any customers that they intend to return their cars in fact we are out there asking them, if they feel that they are a long cars right now given the situation hint they want us to remarket them and no one has taken us up on that offer.
If you look at our order book very few cars are designated for petroleum service and none of those customers have expressed an interest in cancelling in order at this time either. And we really haven’t seen any weakness in the existing fleet, obviously a 99% utilization or in pricing either, other than what we have discussed over the last year or so about the 30,000 gallon tank cars and the pressure on those, but that was due to the overhang of the impending tank car regulation.
So, having said that despite what you might hear from others in the industry, I think it’s a little premature they there will be no effect of this sector on the real market if these low crude prices persist for a long period. Actually, we think many customers are still in the assessment phase regarding the effect on their business, you know this precipitous drop has only been here for two months or three months. So in our view that car types that could potentially be the most impacted our first and foremost the small cube-covered hopper market, obviously one of the commodities with that product carriers is shark fan this is the car that’s most directly related to the drilling of new wells. It already has been a volatile car type over the last few years. This march-up in demand and lease rate due to has been interrupted a few times by some temporary overwhelming.
In particular, small cubes designated for frac sand appear to be a big part of the manufacturing of freight car backlog, and we believe that backlog to be under pressure for cancellation if this new drilling is curtailed. As far as our fleet, as I said and while we do have 3100 cars in for frac sand service it’s obviously a very small part of our fleet they are deployed with high credit customers again for very long term. In addition, our small cubes are deployed in a variety of other commodities are we are seeing increased demand for cars and its other service. So for me it would be a good example. And current rate for small cubes actually remained very strong.
The second type is probably most obvious type of car that would be a factor of 30,000 gallon tank cars that carry crude, ethanol and other refined products. Actually, I mentioned this car type after small cubes because on a low crude price environment it’s unclear how much pressure this existing fleet of 30,000 gallon cars would experience. Even though the economics are drilling new wells could be tough which would definitely affect shark fan cars. Lower crude prices to continue to derive healthy demand for crude and refined products in North America, that demand could continue to be filled by existing North Americas wells and that would still create demand for these cars. So, time will tell is these production and transformation patterns will change but once again its arguably a bigger issue for the manufacturers and their order backlog for new cars and it is for the existing fleet out there.
But, once again GATX’s exposure is with high quality customers and for very long-term. Beyond those two cars types you could see second and third order negative effects, you know certain high pressure cars or certain asset, car type but none of these other car types experienced a boom that small cubes and 30,000 gallon tank cars did over the last decade and they are also tied the movement other real movements in other industries as well.
Also, you could see a number of positive effects from low crude and energy prices on a variety of car types in our fleet, and examples would be car types serving the construction industry, the fertilizer industry both tank and freight cars serving the plastics industry both tank and freight, certain cars serving the steel industry, the order industry, I mean I could go on but beyond the obvious effect of crude drilling and production in the cars who serve those markets. The fact that is that the U.S. economy and the European economy for that matter are largely consumption based and we believe that net effect of sustained lower oil prices should be a net positive for those economy, that economic activity generally benefits rail transportation and a leased fleet such as ours which is in great shape and well positioned from a diversification and term perspective.
And outside rail, low crude prices could also affect our other businesses. So inland and blue water marine vessels could see their fuel cost decrease, airlines will obviously benefit for the same reason that could be positive for the portfolio and our Rolls-Royce joint-venture. Once again all this is going to play out over the coming months as customers assess the facts on their business, obviously we will monitor it and keep everybody informed.
So, I hope that help you think about it. Now let’s go ahead and open it up to questions.
Operator
The question and answer session will be conducted electronically. If anybody wants to ask a question press * on your phone followed by the digit 1, if you are using the speaker phone make sure your mute function is turned off to allow your signal to reach our equipment. Once again *1 to ask a question and first question we will hear from Mike Baudendistel with Stifel.
Mike Baudendistel – Stifel
I just wanted to notice that you didn’t provide an outlook for the lease price index in 2015. And just wondering if you think it is likely that is going to be at a lower rate of change than it was in 2014 just due to more difficult comps associated with expiring leases.
Robert C. Lyons – Executive Vice President and Chief Financial Officer
Good morning Mike, it’s Rob Lyons. We actually expect the LPI to have another very strong year in 2015. As you know we came into 2014 expecting the LPI to be in the mid 30% range and we actually finished the year as Jennifer noted right around 39% so very strong performance.
So in 2015, we’re again expecting the LPI as we look at it today to be in that mid 30% range which is an incredibly strong number, so very positive outlook there. I would echo some of the comments that Brian made that if the energy markets remain low and we’re in an extended period of low crude prices, our customer’s behavior may change we may have to adjust our commercial strategy accordingly and as a result I think the LPI could be more volatile in 2015 on a quarter-to-quarter basis. We’ll have to see how that plays out as the year progresses.
And I add despite the potential for some volatility in the LPI. We don’t envision and I can’t envision a scenario where the LPI is not in very-very positive territory and very strong in 2015 and I think that speaks very directly to the diversity of our fleet and the renewal strategy and term strategy we’ve had over the course of the last few years. So our outlook for the LPI in 2015 is again very positive.
Mike Baudendistel – Stifel
Good. And I also wanted to ask, have you seen, as a result of the really strong production in terms of the number of tank cars, the past several quarters really being at record levels? Is that having an impact on the new lease rates? I understand you said that the lease rates are still up for most commodity types, but if you were to compare lease rates on tank cars right now versus a couple of months ago, is that sort of having a disruptive impact on the market at all?
Brian Kenney – Chairman, President and Chief Executive Officer
That’s a good question. And generally it’s tough to do quarter-to-quarter you know sequential quarter comparisons. But if I look at what tank rates did throughout 2014 and continue in the fourth quarter they are generally up low single mid digit you know base 5% to 7% from 2013 fourth quarter and that progressed fairly evenly through the year. Once again the exception being that 30,000 gallon tank car which has been under pressure due to that regulatory uncertainty for quite some time. Those rates have come down over the last year.
Mike Baudendistel – Stifel
Great those were my question thanks.
Operator
And next we’ll move to Justin Long with Stephens.
Justin Long – Stephens
Thanks and Good morning guys. First question you guys have been pretty clear about the strategy of pushing term on tank cars. And just being in the later innings of that process, is there any way you could provide some more color on the magnitude on your tank car fleet that is coming up for renewal over the next, call it, three years?
Brian Kenney – Chairman, President and Chief Executive Officer
Well over the three year some of that will be determined really on what takes place there in 2015-2016. But our renewal level this year at 17,000 cars typically is a little bit more weighted towards tank. Actually, this year for the first time in a very long time we have more freight cars renewing than tank cars in 2015. That’s ideal and really by design what we’ve done over the course of the last few years. So, as we have extended term the number of tank cars this year and into 2016 will actually be less than freight. And as again I mentioned that’s a really good position to be in because the freight car market has been gathering generating strength throughout 2014 as the year progressed and we expect that to continue in 2015.
Robert C. Lyons – Executive Vice President and Chief Financial Officer
And I would add that having those tank cars come up in 15 that’s a good thing because a lot of those expiring vessels are still at lower rates and we expect strong pricing again in 15 on a variety of tank car types.
Justin Long – Stephens
And maybe to just follow up on that, once you have repriced those tank cars in 2015, I mean, if you look at your total take car book, will all of it at that point be repriced at the higher lease rates we have seen this cycle?
Robert C. Lyons – Executive Vice President and Chief Financial Officer
A significant part of that will has been over the last few years, yeah.
Justin Long – Stephens
Okay. Great. You know you are obviously an active participant in the secondary market for railcars. I was just curious, too, if you could comment on the recent activity and how it has trended. It seems like your approach to the market you know more recently has been more of a net seller. I’m just wondering. Is there potential for that dynamic to start flipping in the other direction or what are you seeing out there?
Brian Kenney – Chairman, President and Chief Executive Officer
We see very high railcar values in a very competitive market when groups of cars come up for sale in the secondary market. And so it’s very difficult to invest right now beyond our committed purchase part. We had some success in 2014 and we always do. But it’s tough given these railcar prices. And naturally as you saw in 2008 to 2010 as those railcar prices come down at some point it’s going to be easier for us.
Robert C. Lyons – Executive Vice President and Chief Financial Officer
I would add on that too as we are both a buyer and seller of cars in the secondary market. So while it does make it challenging to buy cars in the secondary market and we see a lot of competition on that front. When we put packages out for sale we’ve also seen a pretty broad and deep pull of buyers as well which is very good. And as Brian indicated in his comments we expect remarketing income in 2015 to be in the same very strong level that it was in 2014. So we can continue to optimize our fleet.
Brian Kenney – Chairman, President and Chief Executive Officer
And I should object to what you said because we weren’t that stellar in 14 obviously we added 19,000 boxcars.
Robert C. Lyons – Executive Vice President and Chief Financial Officer
But that’s an example where our rail group had to go. It’s very tough to do the standard investment that you see in the past and they did something that was pretty creative in buying those older cars and putting them. They have had great success so far. That’s performed so far well beyond our expectation.
Justin Long – Stephens
Right. That is a great point. And just to be clear, I mean, I guess you have not seen any change in new car prices over the last quarter or two or the pool of buyers that you referenced?
Brian Kenney – Chairman, President and Chief Executive Officer
No, they certainly haven’t come down, new car prices have not come down. That we are not a participant in this price market generally for new car prices, but what we seen out there, what we are paying especially on the freight side, they are not coming down, tank either.
Justin Long – Stephens
Great. That is what I wanted to get a sense for. And I will just ask one more question and pass it along. Right now, the talk is about the energy related railcar market. It makes sense, given that is the majority of the backlog and what is going on with oil prices. But, if you look at the non-energy related railcar types in your fleet and in the industry, where do you think we generally stand in that cycle and what are some of these other car types where you think we could see accelerating demand in 2015?
Brian Kenney – Chairman, President and Chief Executive Officer
It’s an interesting question, people always ask me how the fleet and we are at 99.2% utilization. So it’s little bit hard to assume it gets much better especially on the utilization side obviously, but on the freight side there still seems to be some room to run on certain car types. An example obviously coal is not at peak and that’s improved significantly through 2014, some construction related cars still have room to go, plastic pellets would be another example we expect to see stronger pricing in 2015. So, it’s hard to generalize on a car type by car type basis. There are still some areas where we certainly does it seem if it has peak yet.
Operator
And next we will move onto Art Hatfield with Raymond James.
Art Hatfield – Raymond James
Hey goodmorning everyone. Most of my questions have been answered, but I want to follow up on the LPI question and comments. Is there a point in time and Rob you had mentioned some potential volatility and it sounds like you would say that it’s more near-term demand in the market at that given time that could create that [INAUDIBLE] But is there a time coming at some point, maybe this year or in the next year, where there is a step up in the comps and it gets more difficult to get the same level of success that you have had on the LPI over the last couple of years?
Robert C. Lyons – Executive Vice President and Chief Financial Officer
The answer is yes, eventually. It’s really hard to tell you when that’s going to be because it changes every year. So what we say 2016 looks like will change throughout 2015, depending on what we pull forward, what were new for a year. So last year I think we said we had a different idea of what 2015’s expiring rate would be than we do right now, in fact it appears it’s going to be comparable to the rate last year. That’s why you will see the LPI increase continue to be very healthy in 2015. That rate, expiring rate is not going up yet. It will eventually, but it’s not happening in 2015.
Brian Kenney – Chairman, President and Chief Executive Officer
I would say Art, as when it does go up too and it starts to move up, it will be lockstep fashion, there isn’t a date certain out there where there is a sudden dramatic jump up in that expiring rate. That’s not the way that portfolio is structured.
Art Hatfield – Raymond James
And that is due to your ability to manage terms throughout the cycle? Is that a fair way to think about it?
Brian Kenney – Chairman, President and Chief Executive Officer
Yes, that’s one the reasons.
Art Hatfield – Raymond James
Okay. And just real quick, on the quarter, SG&A, the step up there — and I know, Brian, you had given us guidance that that should be down year-over-year. But any way that we can kind of quantify that or think about what happened in Q4 and what that will do relative to next year?
Robert C. Lyons – Executive Vice President and Chief Financial Officer
Yeah, the Q4 number certainly will not be the run rate for 2015. And Brian mentioned we actually expect on a full year basis for SG&A to be little bit below where we came in, in 2014. So on a run rate basis I dial that back. And when I look at what occurred in 2014 in the fourth quarter, there is the mere end competition in benefit throughout that need to take place based on full year performance. We also had a software write down that we took for a few million dollars, and one of our business is based on some software that we will not be utilizing going forward, and a couple of other year-end items that filtered in there that won’t occur on a go forward basis. Nothing is significant but enough items that in aggregate bump that number up quite a bit. So I would expect on a quarterly basis to be back more in that $46 million, $47 million range going forward.
Art Hatfield – Raymond James
Okay. And then, one last thing and this is kind of a math question to help me understand something. In the European business, just doing my rough calculation on lease revenue or lease income in the quarter divided by the average utilized cars in service, I was coming up with a lease rate, a monthly lease rate in the quarter that was down about 5%, 6% year-over-year. And one I am wondering if there is something that may occur occasionally in that lease income line that I need to think about or maybe I am getting a right number but it’s a mix issue that occurring in the quarter?
Robert C. Lyons – Executive Vice President and Chief Financial Officer
No, we are really interested in that tax issue, raised our marching up in Europe, but I don’t want to give the impression that it’s a there, it’s a very choppy market and the reason the average rate is moving up in euros is because of the new cars and the scrapping of the older cars.
Brian Kenney – Chairman, President and Chief Executive Officer
Yes, I would just add to that as you know from looking at what transpired with the euro effects rate over the course of the year the real devaluation that took place primarily in the fourth quarter. So, there is a revenue hit that’s taken there that translation. So it affects – you are looking just on a quarterly run rate basis converted the dollars that’s the effect.
Art Hatfield – Raymond James
Can we think about what it would have been — can you tell us — you may not even though this off the top of your head — what the rate increases were ex-the FX issue.
Robert C. Lyons – Executive Vice President and Chief Financial Officer
In terms of lease rate
Art Hatfield – Raymond James
Yes
Robert C. Lyons – Executive Vice President and Chief Financial Officer
I mean that is much more of a low single digit type lease rate environment in terms of percentage increase.
Art Hatfield – Raymond James
Okay. And should we think about — I am getting into the weeds here, but when we think about modeling for 2015, should we — is it safe to assume, where the euro is today, kind of try and figure out something with regards to that how that will impact the lease rates for the year? Obviously, subject to change throughout the year and timing of renewals and all that nonsense?
Robert C. Lyons – Executive Vice President and Chief Financial Officer
That’s a good question, I can tell you what we did assume in our 2015 outlook is euro right around 1.17-1.18 it’s actually below that today. But we also for a good portion of the euro income we hedge a significant portion of that with a floor of that not much below 1.17-1.18 today.
Art Hatfield
Amm okay, thanks. Great thanks for the time.
Operator
Okay now Next we’ll move to Kristine Kubacki with Avondale Partners.
Kristine Kubacki – Avondale Partners
Goodmorning Just some questions on the maintenance. I know you talked a little bit about it for 2015. But could you talk — will maintenance expense be pretty level through 2015 or should we think about any seasonality with that? And then, can you give us, remind us just how that will start to ebb in 2016?
Robert C. Lyons – Executive Vice President and Chief Financial Officer
Sure Kristine, its Rob Lyons. There is really no — I wouldn’t factor in any significant seasonality to the maintenance expense as the year progresses even the compliance work should be relatively evenly spread out. Third quarter to fourth quarter ’14 it was probably not last time users on material pickup in that maintenance expense in North America. That’s actually part of that is very much a good news story. And we’re pulling cars out of inventory. Boxcars center being the coal cars we’re pulling out of inventory and prepping for words to put those into service. So it’s a little bit of an abnormal pickup, third quarter to fourth quarter. ’15, it would be relatively stable.
Brian Kenney – Chairman, President and Chief Executive Officer
And as I said the boxcar fleet that’s driving it both from a full year impact of that fleet as well as some work we’re doing on boxcar add boxcars to put it back into service and some that’s capitalized some of the expense so that’s why it was higher as Rob said in ’14 it will probably be a little bit higher in ’15 because of that offset by those compliance events. In general, compliance events actually increased in ’15 but the tank qualification event which is what drive most of that cost decrease in ’15 we did close to 5,000 in ’14. And we should do over 1,000 less in ’15. And to your question beyond that and once again scheduled and things change as you buy and sell cars but schedule we expect that to drop again in ’16-’17 timeframe.
Kristine Kubacki – Avondale Partners
Okay, that’s helpful. And then did you give us some thoughts on remarketing income for ’15?
Robert C. Lyons – Executive Vice President and Chief Financial Officer
We indicated it should be in the same general range as what it was in 2014 with North America Rail again being the big driver of it.
Kristine Kubacki – Avondale Partners
Any cadence quarter-to-quarter we should think about?
Robert C. Lyons – Executive Vice President and Chief Financial Officer
Nothing significant right now that I would highlight. We do have some packages in the market. So those likely occur in first and second quarter. But then we’ll reassess and see what’s available in the back half of the year too.
Kristine Kubacki – Avondale Partners
Just some questions on the maintenance. I know you talked a little bit about it for 2015. But could you talk — will maintenance expense be pretty level through 2015 or should we think about any seasonality with that? And then, can you give us, remind us just how that will start to ebb in 2016.
Brian Kenney – Chairman, President and Chief Executive Officer
Sure. So as a very late start to the selling season for everyone, we were able to bring on another vessel that enabled us to fulfill our contractual commitments for the year. Not everybody else was able to do that therefore some spot cargos became available and we’re able to pick those up and those were pretty profitable. If you assume a normal start to the selling season and it’s going to knock on some when I said that then it would be a more normal year and everybody should be able to fulfill their commitments and those spot cargos may not become available. But once again depends on the weather.
Kristine Kubacki – Avondale Partners
Okay thank you very much for your time.
Operator
And next we’ll move on to Matt BroMatt Brooklier with Longbow Research.
Matt Brooklier – Longbow Research
Hey thanks, good morning everyone. Good color on the potential impact from crude oil prices dropping here. I just have one additional question. Of the 3,100 and this is a little bit nitpicky, but I will ask it anyways. Of the 3,100 cars that you have, covered hoppers in fracq sand, what percentage of those cars are up for renewal this year? Is it about in line with the average for your total fleet or does that number differ a little bit? Thanks.
Jennifer Van Aken – Director
Matt, actually if you look at the renewals for small cube covered hoppers particularly in fracq sand this, it’s actually a pretty small percentage, so relatively smaller than the composition of the rest of our fleet.
Matt Brooklier – Longbow Research
Okay, so a lower number.
Brian Kenney – Chairman, President and Chief Executive Officer
A lower number and in general the volume we have done over the last couple of years in sand has been very long dated. So the price we get over the last couple of years we don’t expect to come up renewals for quite some time.
Matt Brooklier – Longbow Research
Are you able to talk to, on a relative basis I guess, the impact? And you may have talked a little bit to it earlier, but with prices dropping here, the impact in terms of crude cars versus sand cars? It sounds like maybe you are little bit more concerned with that particular market, the sand cars, versus crude here. Or maybe if you could just talk a little bit more to what you are seeing and which cars could be impacted if we have sustained lower oil prices moving forward.
Brian Kenney – Chairman, President and Chief Executive Officer
If those two car types, and when you say concerned about it ironically our small cube-covered hoppers fleet right now is pretty close to record lease rates, and I mean in the existing market and what we have done in the fourth quarter and third quarter. So, we have not seen rates declined there, but what you are reading and what low crude that’s just a potential in 2015 obviously especially if that new drilling doesn’t continue. But right now rates are still extremely high. On the crude cars we have seen those prices come down. If you remember that story, we didn’t really participate in the six months and two year leases we lock the stuff upper-term and we had lower rates during the sub-term than the rest of our, I would say the rest of the industry on average, but still a rate on a 30,000 gallon tanker that was a $175 in 2010, when opt over a $1000 two years-ago, it’s probably come up 20%, 30% since then which by-the-way is still on outstanding rate historically for that car. We anticipate that will still be under pressure in 2015, on the [inaudible]. And that one has materialized for other reasons.
Matt Brooklier – Longbow Research
Very good, thanks for the time.
Operator
And next we will move on to Steve Barger with KeyBanc Capital Markets.
Steve Barger – KeyBanc Capital Markets
As you look across the entire fleet, what percentage of the tank cars have not yet reset at current prices or higher prices?
Brian Kenney – Chairman, President and Chief Executive Officer
Well I would say at least 20% and probably a little bit more. And keep in mind the real acceleration in lease rates in tank occurred over the course of the last 18 months, 24 months. So even cars that we renewed in 2012 are, we have the opportunity to renew those today, even that we did them in 2012 at good rate they will be better today.
Steve Barger – KeyBanc Capital Markets
So, I mean obviously some of that goes into the discussion about the LPI remaining strong for coming years. What percentage of your non-tank fleet is still at what you would consider cyclically low price in term?
Robert C. Lyons – Executive Vice President and Chief Financial Officer
We still have a freight car side of the business.
Steve Barger – KeyBanc Capital Markets
Yes freight
Robert C. Lyons – Executive Vice President and Chief Financial Officer
A very big, not 20% or probably be the reverse of that maybe 70%, 80% because the freight car rates really do not start to improve materially across the broad spectrum of freight cars until last year.
Steve Barger – KeyBanc Capital Markets
Right. And I know there will be timing associated with this, but when you look at the average freight car lease rate that you see right now versus the average market rate, how big is that differential?
Robert C. Lyons – Executive Vice President and Chief Financial Officer
I don’t want to get into too much detail on that, because you really have to start to going car type by car type by car type but it’s material, significant number.
Steve Barger – KeyBanc Capital Markets
I mean material like they are 50% below market rates or just any way to frame that?
Robert C. Lyons – Executive Vice President and Chief Financial Officer
No, I wouldn’t go all the way to 50. Again it’s a pretty difficult number to frame up just given the diversity of that fleet, but in that 20% to 25% type range or greater in certain car types.
Steve Barger – KeyBanc Capital Markets
Got it. And the press release talked about the $3.6 billion of embedded cash flow and that was up $400 million from 2013. Do you happen to know what that change was in 2013 from 2012?
Robert C. Lyons – Executive Vice President and Chief Financial Officer
I don’t have the each of the annual numbers with me, I can tell you the kind of in modern history, if you look back to 2010 coming out of the down cycle that number was 2.3 billion, and today it’s 3.6 billion. So we have added another 1.3 billion of high quality very long-term cash flow, and we have embedded that into the business and it will go up again in 2015.
Steve Barger – KeyBanc Capital Markets
I guess, if this is the right term, the duration of that cash flow? Does it mirror your lease renewal term? Is that how you think about it? Six years or
Brian Kenney – Chairman, President and Chief Executive Officer
That’s a fair assessment, I would say. The other thing we look at it is the percentage of those cash flow that are beyond five year, and that number has gone up, that percentage has gone up over the course of the last few years as you would expect as we have been stretching term. So not only have we been able to gravitate to our highest quality customer and very long-term leases, we are putting cash flow in one of the business for an extended period of time, far more than at any point in our history.
Steve Barger – KeyBanc Capital Markets
Right. And I know this question requires a lot of assumptions, but when you think about how you will deploy that, just in broad numbers, how much goes to asset purchases? How much gets returned to shareholders? How do you think about being able to spend that embedded cash flow?
Robert C. Lyons – Executive Vice President and Chief Financial Officer
Sure, it’s a very good question and it’s something we actually spend a lot of time on. Brian and I and others around here thinking about what that cash flow profile looks like over the course of the next three to five years because it’s significant and as mentioned high quality. So it’s coming in the door. If you look over the course of the last few years just for an example, ’12, ’13 and ’14, we invested $2.6 billion during that time primarily in our rail business. At the same time, we paid dividends of about 180 million in terms of returning capital back to shareholders and about another 190 million in stock repurchase. So just under 400 million returned back to shareholders over the course of the last few years and 2.6 billion invested in assets and growing the balance sheet.
As I look out over the course of the next few years there is a significant number of assumptions that you mentioned that play into that. But all three of those will again be in the mix in a very material way. Looking to continue to grow our rail business both here and North America, Europe and elsewhere, the dividend is extremely important to our shareholders. Our board looks at the dividend very closely. And typically we’ll look at that in January which is the meeting we have every year which is next week.
They clearly recognized the strength of that cash flow and we’ll take that into consideration when we think about what we do with the dividends next week. And we still have 125 million of authorization left under the existing authorization of share repurchase and as I mentioned last year at this time we expected to do about 125 million to 250 million last year which we did and likely do another 125 million roughly in 2015 that is baked into the EPS guidance that I gave you. So we have a significant amount of leeway given the cash flow coming in the door to return some of that capital to shareholders and also invest very opportunistically in our rail business.
Brian Kenney – Chairman, President and Chief Executive Officer
And if I could get back to your first question where it looks like we’re trying to give you or giving you the base events on the percentage of our freight car fleet really isn’t the way we think about it. That’s why I always reluctantly talk about and generalize about the freight car fleet it’s really a variety of different markets and car types. So it wouldn’t necessarily be a good thing if I said there’s a very high percentage of our freight car fleet that is yet to reprice. For example, small cube covered hoppers we have term on that as I’ve said. It’s out there very long at very high rates.
On other hand coal intentionally has been put out on very short terms because we’re waiting for pricing to increase different car type. Grain, we try to get some more term as those rates have come in the last few years. But there is still a lot of that fleet to roll over. Plastic pallets generally in the industry it has very long terms because a lot of those are finance [lease] because that’s not the way we play we have a lot of that portfolio to run over. So we really don’t generalize about freight cars overall. It’s really on a car type basis. And I said that there is number of those car types, plastic pallets, grain, where there is still a lot of repricing to incur and we’re especially excited about the pallet market.
Steve Barger – KeyBanc Capital Markets
Yes. Your last point is really what I was trying to get to, is that there does seem to be still significant amounts of room for the freight side of your business to both push term and raise price.
Robert C. Lyons – Executive Vice President and Chief Financial Officer
Right, for certain car types for others not so much that’s why we struggle let’s say well 40% because that’s not the way think about it.
Steve Barger – KeyBanc Capital Markets
Understood. Last question for me. You have always talked about how important it is to have high-quality customers from a credit standpoint. Are you comfortable with the customer base across the board here, or is there room to improve quality in some categories
Robert C. Lyons – Executive Vice President and Chief Financial Officer
We are absolutely comfortable with the customer base we have. It’s an outstanding — if you saw the top 50 names you probably recognize all 50 and we’ve used the strong market over the course of the last few years to continue to put our cars with some of our strongest and highest quality customers. So, the strength of our customer base is outstanding, it’s in great shape. We don’t see any need to significantly alter that going forward.
Brian Kenney – Chairman, President and Chief Executive Officer
And this is where I give kudos to our fleet and sales organizations because they’ve done an outstanding job here. And this is in an up market that’s where their job gets really tough, that’s when they have the difficult conversations with customers about extending term and not necessarily doing business with the customers that aren’t that great at credit quality but offer very high lease rates. And so they’ve done tremendous job doing what Rob suggested really locking it up with the best customers for the long term. And that’s hard to do. Those are difficult conversations to have.
Operator
And next we’ll move to David Richards with Pine River Capital.
David Richards – Pine River Capital
Hey guys my questions were asked and answered. Thanks so much.
Operator
And we have no further questions at this time.
Jennifer Van Aken – Director
Okay. I just like to thank everyone for their participation on the call this morning. I will be available this afternoon to answer any follow up questions. Thanks.
Operator
And that will conclude today’s call. We thank you for your participation.
